The Relevance of Open Innovation to Small and Medium-sized Enterprises - Research Paper Example

Innovation and Enterprise 2 - The Relevance of Open Innovation to SME’s - Total Number of Words 755 Introduction In response to tight market competition, a lot of companies today are considering innovation as a way to improve a company’s overall business performance. By incorporating the internal development process of each company with the open innovation framework, several studies strongly believed that it is possible for companies to strengthen their position in the market (Chesbrough, 2006, 2003; EIRMA, 2004). Open innovation is commonly adopted by the large-scale business organizations in order to gain competitive advantage from its research and development (R&D) and other related business ventures (Kim and Park, 2010; Chesbrough, 2003). It is possible to apply the concept of open innovation on SMEs. However, Chesbrough (2006) revealed that SMEs have different ways to adopt with the open innovation as compared to large-scale multinational companies. Considering the growing importance of open innovation among the large-scale companies, this study will seek to evaluate and explore the relevance of open innovation on SME’s. To give the readers a better understanding of this subject matter, an overview with regards to open innovation will be provided in this study. As part of going through the main discussion, this study will first discuss how SMEs are able to adopt to open innovation followed by evaluating and examining several existing research studies with regards to the impact of open innovation activities over the business performances of SMEs. Open Innovation: An Overview Open innovation requires companies to use internal and external sources to make use of technologies. In line with this, Chesbrough (2003) explained that the use of external pathways can increase the chances wherein companies will be able to innovate new product and technological processes which could improve the overall performance of a company. Instead of heavily relying on internal R&D, the large-scale multinational companies were enticed to incorporate open innovation in their business practices in order to gain competitive advantages over their close business competitors (Chesbrough, 2003). The process of developing and commercializing the use of technologies within the internal boundaries of a business organization is called the “closed innovation” (Chesbrough, 2003). In the past, large-scale multinational companies are heavily relying over the use of their internal R&D to allow them to develop new product lines that can be easily marketed to the consumers. By doing so, large-scale multinational companies were able to outperform the SMEs (Teece, 1986). Since a lot of companies had been entering into joint-venture projects, the use of closed innovation is no longer applicable in this context. Unlike the closed innovation, open innovation involves the practice of technology exploitation and technology exploration (De Vrande et al., 2008). In line with this, technology exploitation means that the company is expected to gain control over the use of technology outside the boundary of a business organization. On the other hand, technology exploration means that the company is expected to make use of external sources in order to further develop the company’s existing technology or innovate new ones. Through the practice of technology exploitation and technology exploration, companies that manage to adopt to open innovation are expected to develop a maximum value from the use of the available technology. In general, there are two ways in which a company can practice technology exploitation. First of all, Chesbrough (2003) and Lord, Mandel and Wager (2002) mentioned that commercializing technologies is possible by spinning out new ventures. Secondly, a company can commercialize the use of technology through external pathways like acquiring an IP license from external parties (Chesbrough, 2006, 2003). Although it is possible to commercialize technology by extending IP license to external parties, West (2003) explained that not all companies that trade IP rights can be successful due to the risk wherein knowledge with regards to the use of technology can be transferred directly to competitors. Since the innovating firm has already spent a lot of money on internal R&D, the innovating firm can lose a lot of money to imitating companies. As part of technology exploration, companies can get new ideas through venture capital (Dushnitsky and Lenox, 2005; Ernst, Witt and Brachtendorf, 2005), licensing of other companies’ IP (Lichtenthaler, 2007; Chesbrough, Vanhaverbeke and West, 2006; Chesbrough, 2003), or outsourcing their R&D from other non-competing companies such as the universities (Fontana, Geuna and Matt, 2006; George, Zahra and Wood, 2002; Gomes-Casseres, 1997). Among these options, the best and most cost-effective ways of exploring the use of technology is the user-initiated innovations wherein the company is focused on getting the customers participate in the product development processes (Gales and Mansour-Cole, 1995). Since the customers are the target buyers for certain products, several studies revealed that the inability of a company to consider the customers’ specific needs in the design of new product or technology innovation could increase the risk of market failure (Hienerth, 2006; Lettl, Herstatt and Gemuenden, 2006; Cooper and Kleinschmidt, 1995). Aside from gathering information straight from the customers, accredited suppliers and employees can also participate in the company’s product and technology innovation (Chesbrough, Vanhaverbeke and West 2006; Von Hippel, 2005). How SMEs are Able to Adopt to Open Innovation Unlike the large-scale multinational companies, most of the SMEs exist within domestic market environment. Therefore, for SMEs to be able to exist within the global market environment, SMEs should enter into a business venture with the large-scale companies or a combination of SMEs (Rahman and Ramos, 2010). As compared to large-scale multinational companies, SMEs require an entirely new different approach in adopting to open innovation. For this reason, Rahman and Ramos (2010) strongly suggest that a new “networked paradigm” has to be developed in order to allow the SMEs to benefit from the practice of open innovation. For example, instead of encouraging the SMEs to invest in their own internal R&D, most of the small and medium-scale companies are encouraged to practice connect and develop (C&D) (Rahman and Ramos, 2010). Using the concept of technology exploitation, SMEs can improve their existing technological capacity by leveraging from outside sources (De Vrande et al., 2008). Therefore, to cut down the high-cost of R&D, small- and medium-companies are encouraged to invite external partners to join them in the development of new products and technologies (Pullen et al., 2008). To be able to practice open innovation, SMEs should first select their preferred approach to product and technology innovation (i.e. spinning out new ventures, acquiring an IP license from external parties, venture capital, licensing of other companies’ IP, or outsourcing their R&D from other non-competing companies such as the universities) (Fontana, Geuna and Matt, 2006; Lichtenthaler, 2007; Chesbrough, Vanhaverbeke and West, 2006; Chesbrough, 2006, 2003; West and Gallagher, 2006; Dushnitsky and Lenox, 2005; Ernst, Witt and Brachtendorf, 2005; George, Zahra and Wood, 2002; Gomes-Casseres, 1997). Rather than competing with one another, small- and medium-companies are encouraged to cooperate with their chosen partner to allow them to develop and produce new products that they can readily sell in the market (De Backer, 2008). Relevance and Potential Impact of Open Innovation Activities over the Business Performances of SMEs The main purpose of implementing open innovation strategies on SMEs is to allow the small- and medium-scale companies to be able to maximize the value of their internal R&D. According to Rahman and Ramos (2010, p. 479), for a successful open innovation strategy to be implemented, the SMEs should be able to develop “creative ways to exploit internal innovation by incorporating external innovation into internal development, and be able to motivate external actors to sustain an ongoing stream of external innovations”. Despite the relevance of open innovation to SMEs, Kim and Park (2010) revealed that a very few SMEs managed to successfully implement effective open innovation strategies. After conducting an empirical analysis over the significant effects of open innovation activities over the business performance of SME’s, Kim and Park (2010) found out that the process of applying the concept of open innovation on SMEs does not always lead to a positive effect over the business performance of small-medium sized enterprises as compared to that of a large-scale enterprises. Because of the challenges associated with implementing an open innovation strategy, there are very few cases wherein SMEs has been successful after adopting the concept of open innovation (Kim and Park, 2010). West and Gallagher (2006) explained that most of the large-scale multinational companies are already practicing open innovation scheme for a long time and that most of SMEs with high-tech facilities prefer to maintain a close business relationship with other large-scale organizations (i.e. research centres, universities, etc.). On the other hand, SMEs with low-tech facilities could either have insufficient resources to determine their needs for innovation or are simply not interested in taking advantage of R&D (West and Gallagher, 2006). For these reasons, most SMEs failed to implement a successful open innovation strategy. Conclusion and Recommendations Open innovation involves the process of using external pathways in order to increase the chances wherein companies could easily innovate new product and technological processes that can improve the overall performance of a company (Chesbrough, 2003). For a company to have open innovation strategies, the business owners has to apply at least one of the following approaches: (1) enter into a spinning out new ventures; (2) acquiring an IP license from external parties; (3) venture capital; (4) licensing of other companies’ IP; and/or (5) outsourcing their R&D from other non-competing companies such as the universities) (Fontana, Geuna and Matt, 2006; Lichtenthaler, 2007; Chesbrough, Vanhaverbeke and West, 2006; Chesbrough, 2006). The business concept of open innovation can benefit the SMEs by empowering the small- and medium-scale companies to maximize the use of their internal R&D. Because of the business advantages associated with open innovation, several studies have been trying to determine how the SMEs can benefit from further technological innovation (Kim and Park, 2010; Rahman and Ramos, 2010; van de Vrande et al., 2009). Although there are some SMEs that are already interested in implementing an open innovation strategies, not all of them are able to benefit from open innovation strategies (Kim and Park, 2010). According to West and Gallagher (2006), SMEs with low-tech facilities could either have insufficient resources to determine their needs for innovation or are simply not interested in taking advantage of R&D. Therefore, this study strongly recommends the need to educate the SMEs with regards to developing a new business organizational culture that is open to the practice of business collaboration with external partners, connect and develop (C&D) practices, and the concept and importance of a “networked paradigm” (Rahman and Ramos, 2010). By doing so, SMEs with limited resources will be given the opportunity to practice open innovation. References Chesbrough, H., 2006. Open business models: How to thrive in a new innovation landscape. Harvard Business School Press: Boston, MA. 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